With approximately 2,500 External Asset Managers (EAMs) and Trustees managing between CHF475-600bn of AuM, Switzerland is one of the most active and fragmented wealth management centres globally. The sector finds itself at the crossroads of a multitude of national and international trends. Industry players are struggling to grow organically via the recruitment of senior Relationship Managers (RMs) able to attract sufficient client assets. Meanwhile revenue margins are decreasing, weighing on the industry at large. Clients’ demand for alpha generation, notably through differentiated and sustainable offerings, and implementation of the Financial Institutions Act (FINIG) are further challenges to EAMs’ profitability. In some cases the new regulatory approval process has discouraged EAMs from filing an application.

As a result there has been  a notable increase in the number of M&A transactions in Switzerland over the past 18 months, and in particular since the beginning of 2022. Consolidation in the industry is picking up speed.

M&A transactions are rising

Swiss EAMs are required to obtain authorisation from FINMA, the Swiss financial market supervisory authority, by the end of 2022. This has led, as of end-April 2022, to 490 applications by EAMs, less than 20% of the total sector, and only 242 authorisations have been granted so far.

The rise in regulatory constraints will entail additional costs for EAMs. One-off regulatory costs are expected to quadruple and annual regulatory-related expenses to at least double, benefiting larger EAMs with a critical mass, while smaller EAMs will struggle to cover these costs. This, coupled with intensified competition and the need for sustainable growth, innovation and differentiation, has accelerated  consolidation in the industry.  This is reflected in the rising number of M&A deals since 2021: 9 EAM transactions were announced in the first five months of 2022, compared to 8 transactions in the entirety of 2021, and just  1 to 4  per year over the 2014-2020 period.

Of 17 transactions since 2021 involving players with over CHF500m AuM, 7 transactions were related to mergers or acquisitions among EAMs, 4 transactions involved a local private bank as a strategic investor, and 6 consisted of a management buy-out and/or had a financial investor as an acquirer.

The most common rationale behind this increased activity has been the search for critical mass in a highly competitive market and to create cost synergies, in anticipation of future rising costs. In addition, close to half of transactions since 2021 were driven by succession planning and/or the need for a shareholder liquidity event, with sellers taking advantage of the consolidation dynamic and high valuation environment (see below). In these cases EAMs, in particular those of a significant size, are usually sold to banks or international financial investors with considerable financial resources as other EAMs do not typically have the capacity to carry out such transactions. EAMs themselves have consolidated instead through mergers between equals (share exchanges) or acquisition of relatively small entities. Noteworthy in the consolidation context is the role of local local private banks and their appetite for EAM targets, largely with the aim of creating distribution channels for proprietary products and services.

We expect smaller EAMs (with less than CHF500m AuM), which make up 80-90% of the market, to consolidate substantially in the short term as new regulatory constraints come into force. A significant number of these players will hand over their business via referral agreements (paying for a future share of revenues) to other EAMs or depositary banks, rather than engage in traditional M&A share deals. Up to 500 or even 1,000 of these players could, we believe, disappear over time.

Appropriate structuring is key to a successful transaction

Key challenges of transacting EAM businesses include retaining clients and client-facing staff. Appropriate transaction structuring becomes paramount to mitigate risks and preserve intrinsic value of acquired EAM businesses. Various transactions have therefore recently been structured as strategic partnerships, whereby the acquired entity’s key staff are incentivised and retained through direct or indirect equity ownership – recent examples include Octogone/Focus Financial and 1875/REYL, where the acquired entity continues to operate in a number of areas on a standalone basis post-transaction. However, one of the most common ways to ensure there is no loss of value and a smooth management transition between sellers and buyers remains to structure the price mechanism carefully, often with earn-outs related to client and/or key staff retention.

Scarcity of available acquisition opportunities combined with strong demand drives valuations

EAMs’ valuations are a function of a multitude of factors, including but not limited to the size, growth profile and profitability of the underlying business. These various factors lead to heterogenous results on a price per AuM or EBITDA multiple bases. We observe, however, a material pick up in valuations across the sector over the past 24 months, explained in part by the scarcity of relevant opportunities compared to the strong demand for opportunities for inorganic growth. Larger Swiss EAM transactions, for growing and profitable franchises, sold via carefully orchestrated auction processes, have generated valuation multiples of 10-15x their normalised EBITDA (i.e adjusted for exceptional and non-recurring items); market-leading franchises achieved 15x and more. By contrast, one-to-one bilateral discussions have either significantly reduced transaction certainty or failed to maximise shareholder value. Transactions involving smaller market players, with AuM below CHF500m, and generally facing increased risks of concentration (of staff and/or clients) have been experiencing lower valuations, with EBITDA multiples in the 5-6x range on average.

We further believe that current valuations are also benefitting from elevated asset prices and EAMs’ intrinsic business characteristics: notably their exposure to long-term growth in in the global HNW/UHNW sector and their capacity to generate attractive cost-income ratios as well as a recurring cash flow profile – in particular for larger market players with AuM above CHF1bn. In addition, the client base of many market players is seen as being significantly “de-risked” following the implementation of various AML/KYC measures, including the automatic exchange of information (AEOI), across the industry and at depository banks in recent years. Nevertheless, EAM valuations can (still) be highly influenced by the composition of the customer base (its risks, profile and markets), and in particular its concentration. Product suites such as ESG, or private asset offerings or niche services (Corporate advisory, etc), can also positively impact valuation multiples by demonstrating EAMs’ capacity to differentiate and adapt to changing client demands.

Summing up

As regulatory changes increase the pressure on an already highly competitive and fragmented market, EAM players are increasingly turning to M&A to ensure sustainable growth and competitiveness. High recent valuations and the need to tackle succession planning are key additional drivers of recent M&A activity. We expect for these trends to continue over the coming months and years.

Key contacts

Jean-François Lagassé - Managing Partner, Financial Services Industry, Switzerland

Jean-François is the Swiss Financial Services Industry Leader and a Partner within Deloitte Switzerland’s Financial Advisory business. He also leads our Global Wealth Management segment and is a member of the Swiss Executive. He has more than 20 years of professional experience in the field and has worked in the United States, Canada and Switzerland. Jean-François has successfully completed numerous M&A advisory and valuation mandates in sectors such as financial services, technology and telecom industries.

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Anthony West- Head of Corporate Finance and FSI M&A - Switzerland

Anthony leads the end-to-end M&A services proposition in Switzerland within Financial Services, while at the same spending most of his time overseeing the FSI Corporate Finance Advisory practice in Switzerland. Anthony joined Deloitte in 2012 and has been active in Financial Services M&A for over 25 years. Prior to joining Deloitte, Anthony was a Partner at a leading M&A boutique and before that was part of the FIG teams at Morgan Stanley and Credit Suisse Investment Bank, both in London, where he was responsible for coverage of the DACH region.

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Jean-Philippe Fiot - Director FSI M&A - Switzerland

Jean-Philippe is a Director in our M&A advisory team and has over 12 years of industry experience. Jean-Philippe has advised on a broad range of M&A transactions across the banking, wealth and asset management sectors in Switzerland and internationally. Prior joining Deloitte, he has worked for an investment banking boutique in the UK.

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Daniel Schaaff - Director FSI M&A - Switzerland

Daniel is a Director in our Swiss M&A advisory practice focusing exclusively on the assessment, structuring and execution of mergers, acquisitions, disposals and joint ventures within the financial services industry. Daniel has advised on a broad range of M&A transactions, with a strong focus on the asset and wealth management sub-sectors, including private banking and business services outsourcing (BPO) providers, both in Switzerland and internationally. Prior to joining Deloitte, Daniel worked for an investment banking boutique in London and the in-house M&A team of a leading Swiss bank in Zurich.

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